DIRECTV 2003 Annual Report Download

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2003
THEDIRECTVGROUP
The
DIRECTV
Group
ANNUAL
REPORT

Table of contents

  • Page 1
    The DIRECTV Group 2003 ANNUAL REPORT THEDIRECTVGROUP

  • Page 2
    ...gross owned and operated subscribers in 2003, an all-time record for a single year • Generates the highest average monthly video revenue in the U.S. multi-channel entertainment industry with $63.90 per customer in 2003, an increase of 7% over 2002 • Broadcasts all of the local channels in 64 top...

  • Page 3
    ... of operating profit (loss) before depreciation and amortization, see Summary Data in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in The DIRECTV Group, Inc.'s Form 10-K for the year ended December 31, 2003 included in this Annual Report. 1,322...

  • Page 4
    ... News Corporation and the new management team will bring a unique mix of expertise, assets and vision that will enable us to accomplish these goals. DIRECTV has great strengths that we will capitalize on as we drive the business forward. DIRECTV is the leading brand in pay television-it is a market...

  • Page 5
    ... by News Corporation and Fox in news, sports and entertainment on both a national and local level will be critical strengths for establishing DIRECTV's content leadership. Moreover, we must do more than simply provide customers with hundreds of channels. Interactivity, video on demand, specialized...

  • Page 6
    ... Hughes Network Systems (HNS), we have an array of solid businesses with growth potential. In particular, the expected service launch in 2005 of HNS' new Spaceway platform will bring the next generation of satellite broadband services to the marketplace. With the emergence of DIRECTV Latin America...

  • Page 7
    ...East Imperial Highway El Segundo, California 90245 (310) 964-0808 (Address, including zip code, and telephone number, including area code, of registrants' principal executive office) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered...

  • Page 8
    ...uncertainties in many Latin American countries in which DIRECTV Latin America, LLC operates; foreign currency exchange rates; ability to obtain export licenses; competition; the outcome of legal proceedings; ability to achieve cost reductions; ability to timely perform material contracts; ability to...

  • Page 9
    ... use, including video, data, voice, multimedia and Internet services. Our businesses include: • DIRECTV, the world's leading digital multi-channel entertainment service, based on the number of subscribers. DIRECTV, which includes businesses in the U.S. and Latin America, constitutes our Direct...

  • Page 10
    ... currently distributes to its customers more than 850 digital video and audio channels, including about 125 basic entertainment channels, 31 premium movie channels, over 25 regional and specialty sports networks, an aggregate of over 600 local channels, over 35 Spanish and Chinese language special...

  • Page 11
    ...dealers. The receiving equipment consists of a small receiving satellite dish antenna, a digital set-top receiver and a remote control, which is referred to as a "DIRECTV System." After purchasing and installing a DIRECTV System, customers activate the service by calling DIRECTV U.S. and subscribing...

  • Page 12
    ...single telephone number 24 hours a day, seven days a week to request assistance for hardware, programming, installation and technical support. DIRECTV U.S. continues to increase the functionality of telephone-based and web-based self-care features in order to better manage customer service costs and...

  • Page 13
    ..., comprehensive coverage to areas with low population density in the U.S. and the ability to quickly introduce new services to a large number of customers. • Substantial Channel Capacity and Programming Content. DIRECTV U.S. currently distributes more than 850 digital video and audio channels, of...

  • Page 14
    ... to introduce compelling services that are also easy to use and customer-friendly. DIRECTV U.S. believes that advancements in its technology will lead to enhanced digital video recorders, or DVRs, more standardized set-top receivers, HDTV programming and reduced signal theft. • Enhance DVRs and...

  • Page 15
    ... and dealers, it also plans to continue to develop and strengthen its direct sales channels and recently announced strategic marketing alliances with Regional Bell Operating Companies, or RBOCs, such as Bell South and Verizon. Improve Customer Service. DIRECTV U.S. expects to implement initiatives...

  • Page 16
    ... for enhanced service offerings such as digital cable, broadband Internet access and telephony services. Cable companies bundle these services with their basic services, offering discounts and providing one bill to the consumer. • Other DBS and Direct-To-Home Satellite System Operators. DIRECTV...

  • Page 17
    ...in the direct-to-home satellite television market in competition with DLA. News Corporation, the Company, and the respective partners in DLA and SKY Latin America are exploring the benefits of consolidation in the pay-television market in Latin America. There has been no agreement reached to date on...

  • Page 18
    ... of the U.S. video market by developing high margin customer-driven applications, increasing sales to the U.S. and other governments, using advanced IP-based applications to meet increasing demand, launching service extensions and selectively pursuing acquisitions. During the fourth quarter of 2003...

  • Page 19
    ...-topeer applications like video conferencing, distance learning and telemedicine. HNS plans on capitalizing on its expertise in private business networks and advanced satellite-based communication technology and gradually transitioning its current Ku-band enterprise VSAT customers to the SPACEWAY...

  • Page 20
    ...companies, using cable modems, and RBOCs, using DSL technology. RCA/Thomson Consumer Electronics, Samsung Electronics and Sony Corporation are the primary competitors in the manufacture of DIRECTV set-top products. ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES We review our competitive position...

  • Page 21
    ... regulations and copyright laws that could materially affect its business as a distributor of multi-channel video and audio programming. They include: • Local-into-Local Service and Limitation on Retransmission of Distant Broadcast Television Signals. In 1999, Congress enacted the Satellite Home...

  • Page 22
    ... carriage of such signals. Compliance with must carry rules may also mean that DIRECTV U.S. may not be able to use capacity that could otherwise be used for new or additional national programming services. • FCC Conditions Imposed In Connection With The News Corporation Transactions. The FCC...

  • Page 23
    ... to our long-term business strategy. The continued development of new technologies, particularly as they relate to the DIRECTV service, including innovations in DVR capability, interactive applications and HDTV, may provide new and improved products that will continue to fuel business opportunities...

  • Page 24
    ... GROUP, INC. ACCESS TO COMPANY REPORTS Our website address is www.directv.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished, if any, pursuant to Section 13(a) or 15(d) of the Securities Exchange...

  • Page 25
    ... derived from its contract with the NRTC. On January 23, 2004, DIRECTV moved to dismiss all of Plaintiffs' remaining claims and moved for reconsideration of its summary judgement motion on the term of Plaintiffs' member agreement. DIRECTV filed suit in California State Court, Los Angeles County, on...

  • Page 26
    ... Garcia, doing business as Direct Satellite TV, an independent retailer of DIRECTV system equipment, instituted arbitration proceedings against DIRECTV U.S. in Los Angeles, California regarding commissions and certain chargeback disputes. On October 4, 2001, Mr. Garcia filed a class action complaint...

  • Page 27
    ... December 5, 2000, Personalized Media Communications, LLC and Pegasus Development Corporation filed suit in the U.S. District Court for the District of Delaware against DIRECTV, Inc., the Company, Thomson Consumer Electronics and Philips Electronics North American Corp., alleging patent infringement...

  • Page 28
    ... A purported class action, P. Shoenfeld Asset Management LLC, et al. v. Shaw et al., was filed in Delaware Chancery Court on December 18, 2002, against the Company and PanAmSat's Board of Directors. The suit alleged that the settlement between EchoStar Communications Corporation and the Company of...

  • Page 29
    ... no shares of the Company's Preferred Stock outstanding at December 31, 2003. Since the split-off from GM, the Company's Board of Directors has not paid, and does not currently intend to pay in the foreseeable future, cash dividends on its common stock. The Company paid a $275 million special cash...

  • Page 30
    ... regarding compensation plans under which our equity securities may be issued is included in Item 12 by incorporation by reference to the Proxy Statement for the Annual Meeting of Stockholders of the Company scheduled to be held on June 2, 2004. ITEM 6. SELECTED FINANCIAL DATA For Years Ended and As...

  • Page 31
    ...MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY DATA Years Ended December 31, 2003 2002 2001 (Dollars in Millions, Except Per Share Amounts) Consolidated Statements of Income Data: Total revenues ...Total operating costs and expenses ...Operating profit...

  • Page 32
    ...for capital expenditures and business acquisitions. The Company believes this measure is useful to investors, along with GAAP measures (such as revenues, operating profit and net income), to compare the Company's operating performance to other communication, entertainment and media service providers...

  • Page 33
    ... Years Ended December 31, 2002 2001 (Dollars in Millions) Direct-To-Home Broadcast Total Revenues ...% of Total Revenues ...Operating Profit (Loss) ...Add: Depreciation and Amortization ...Operating Profit Before Depreciation and Amortization ...Operating Profit Margin ...Operating Profit Before...

  • Page 34
    ... pay-per-view movie and event choices and seven HDTV channels. Although DIRECTV U.S. distributes over 600 local channels, a customer receives only the local channels in the customer's home market. DLA is a provider of digital direct-to-home satellite television entertainment in Latin America, which...

  • Page 35
    ... of DIRECTV set-top receivers, having shipped over 14 million units. HNS is also developing SPACEWAY, a more advanced satellite broadband communications platform that is expected to provide customers with high-speed, two-way data communications on a more cost-efficient basis than systems that...

  • Page 36
    ... million during the first quarter of 2004 as a result of the settlement of certain obligations in connection with the confirmation of the Reorganization Plan. Strategic Initiatives In February 2004, we announced our intent to focus on the direct-to-home satellite businesses. We are also considering...

  • Page 37
    ...a high level of customer service and by providing loyalty and retention offers to its existing subscribers. The loyalty and retention offers include such offers as the additional set-top receiver, DVR and local channel upgrade programs. DIRECTV U.S. finds that subscribers that have advanced products...

  • Page 38
    ... and the cost of customer retention and upgrade programs associated with their existing subscribers are due to an expected increase in the number of set-top receivers and DVRs per subscriber, partially offset by lower set-top receiver costs. In 2004, we expect PanAmSat's operating profit to remain...

  • Page 39
    THE DIRECTV GROUP, INC. DIRECTV service to its NFL SUNDAY TICKET subscribers, including games broadcast in HDTV and the NFL CHANNELâ„¢. In 2003, DIRECTV U.S. increased the price charged for the NFL SUNDAY TICKET package in order to cover the increased costs under the new agreement. On July 1, 2003, ...

  • Page 40
    ...'s breach of contract to launch ten satellites on the Space Shuttle. During 2001, we announced a nearly 10% reduction of our approximately 7,900 employees, excluding DIRECTV customer service representatives, located in the U.S. As a result, about 750 employees across all business disciplines were...

  • Page 41
    ... program supplier rate increases, the launch of additional local and other channels during 2003, increased costs associated with the new NFL SUNDAY TICKET contract and an increase in gross subscriber additions through direct customer acquisition programs. We include costs to acquire new DIRECTV...

  • Page 42
    ... 2000 sale by the Company of our satellite systems manufacturing businesses to Boeing. As a result of the settlement, we recorded an after-tax charge of $6.3 million in discontinued operations in 2003. On February 28, 2003, we completed the shut down of DIRECTV Broadband, Inc., or DIRECTV Broadband...

  • Page 43
    ... components of the Direct-To-Home Broadcast segment operating results for the years ended December 31: Change 2003 2002 (Dollars in Millions) $ % Revenues DIRECTV U.S...$7,695.6 $6,444.6 $1,251.0 19.4% DIRECTV Latin America ...597.7 679.7 (82.0) (12.1)% Operating Profit (Loss) Before Depreciation...

  • Page 44
    ... and an increased price for the NFL SUNDAY TICKET package. The improvement in average monthly churn to 1.5% in 2003 was primarily due to continued strong customer service and an increase in the number of markets with local channels resulting in a higher number of subscribers purchasing local channel...

  • Page 45
    ... to PanAmSat's new G2 Satellite Solutions division, which was formed after the acquisition of the assets of Hughes Global Services, or HGS, from the Company on March 7, 2003. This increase was partially offset by a termination fee received in 2002 from one of PanAmSat's video customers and by the...

  • Page 46
    ... the substantial completion in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs. In addition, the decrease in revenues at the Satellite Services segment was primarily due to a sales-type lease transaction executed during 2001 for which...

  • Page 47
    ... sales-type lease transaction executed during 2001 for which there was no comparable transaction in 2002. Cost of products sold decreased by $81.6 million due to the decreased equipment sales at the Network Systems segment discussed above, partially offset by increased shipments of DIRECTV receiving...

  • Page 48
    ... DIRECTV Broadband. As a result, DIRECTV Broadband has been reported as a discontinued operation in the consolidated financial statements, and its revenues, operating costs and expenses and other non-operating results are excluded from the continuing operating results of the Direct-To-Home Broadcast...

  • Page 49
    ... with multiple set-top receivers. The decrease in average monthly churn was due to an increase in the number of new subscribers signing up for 12 month programming commitments, improved customer service and more stringent credit screening practices for new customers. The increase in operating profit...

  • Page 50
    ... to a decline in sales-type lease revenues that amounted to $19.6 million for 2002 compared to $67.9 million for 2001. The higher operating profit before depreciation and amortization was principally due to increased operating efficiencies that resulted from cost savings initiatives, a $40.1 million...

  • Page 51
    ... in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs, partially offset by increased sales of DIRECTV set-top receivers, which totaled about 2.6 million units in 2002 compared to about 2.0 million units in 2001. The change in operating...

  • Page 52
    ...for the NFL SUNDAY TICKET contract at DIRECTV U.S. and payments resulting from the DLA bankruptcy proceedings. We anticipate using more cash for investing activities related to capital expenditures at DIRECTV U.S. for satellites and broadcast equipment used in the launch of new local channels and at...

  • Page 53
    ... equal to the London Interbank Offered Rate, or LIBOR, plus 2.75%, which may be increased or decreased under certain conditions. The revolving credit facility was not affected by the amendment. DIRECTV is required to pay a commitment fee of 0.50% per year on the unused commitment under the revolving...

  • Page 54
    ... be paid on our common stock only when, as, and if declared by our Board of Directors in its sole discretion. Our Board of Directors does not currently intend to pay cash dividends on our common stock. Our future earnings, if any, are expected to be retained for the development of our businesses for...

  • Page 55
    ... part of the Direct-To-Home Broadcast segment. The purchase price was $197.8 million and was paid in cash. On December 13, 2002, we announced that DIRECTV Broadband would close its high-speed Internet service business in the first quarter of 2003 and transition its existing customers to alternative...

  • Page 56
    ... can change significantly based on the future performance of satellites. Service contract commitments include minimum commitments for the purchase of services that have been outsourced to third parties, such as customer call center operations and billing services. In most cases, actual payments...

  • Page 57
    ... services company, DIRECTV U.S. agreed to provide Telesat, subject to FCC approval, the use of the DIRECTV 3 satellite, which is currently used as an in-orbit spare, through the end of its useful life and in return Telesat agreed to allow DIRECTV U.S. the use of its 72.5 WL Canadian orbital location...

  • Page 58
    ... continue to serve these existing customers until PanAmSat replaces or supplements them with new satellites. PanAmSat is working with the satellite manufacturer to determine the long-term implications of this degradation to the satellites and will continue to assess the operational impact. At this...

  • Page 59
    ... costs. In addition, DIRECTV U.S. agreed to pay Space Systems/Loral an additional $25.0 million for the completion of the DIRECTV 7S satellite. DIRECTV 8, which is expected to be launched in the second quarter of 2005, will provide national coverage from 101 WL and will also be able to operate...

  • Page 60
    ... is currently developing SPACEWAY, a more advanced satellite broadband communications platform. SPACEWAY will eventually include three satellites, which are currently under construction. HNS expects to launch the first SPACEWAY satellite in North America in 2004 and expects to introduce service in...

  • Page 61
    .../or changes in discount rates could result in a write-down of goodwill or intangible assets with indefinite lives in a future period which could be material to our consolidated results of operations and financial position. Multi-Year Programming Contracts for Live Sporting Events. We charge the cost...

  • Page 62
    ...losses in excess of other investors' investments. Stock-Based Compensation. We issue common stock options to our employees with exercise prices equal to the fair value of the underlying security at the date of grant. We also grant restricted stock units to our employees. Beginning on January 1, 2003...

  • Page 63
    ... meet its financial commitments but there is limited assurance over any long period of time that interest and principal payments will be made or that other terms will be maintained. In general, lower ratings result in higher borrowing costs. A security rating is not a recommendation to buy, sell, or...

  • Page 64
    ... of B+ for long-term corporate credit rating, BB- for senior secured debt, and B- for senior unsecured notes. At the same time, S&P revised its Credit Watch implications on PanAmSat from developing to positive. The rating action stemmed from the announcement of the News Corporation transactions. On...

  • Page 65
    THE DIRECTV GROUP, INC. Investments We maintain investments in publicly-traded common stock of unaffiliated companies and are therefore subject to equity price risk. These investments are classified as available-for-sale and, consequently, are reflected in our Consolidated Balance Sheets at fair ...

  • Page 66
    ... policies and guidelines. The unqualified certifications of the Company's Chief Executive Officer and Chief Financial Officer related to the consolidated financial statements, other financial information, internal controls and disclosure controls are included in the Annual Report on Form 10-K filed...

  • Page 67
    ... management and the report of the independent auditors to the Committee, the Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange...

  • Page 68
    ... July 1, 2003, The DIRECTV Group, Inc. adopted Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities-an interpretation of ARB No. 51." /S/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Los Angeles, California March 9, 2004 61

  • Page 69
    ... 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2003 2002 2001 (Dollars in Millions, Except Per Share Amounts) Revenues Direct broadcast, leasing and other services ...$ 9,240.4 Product sales ...880.8 Total Revenues ...Operating Costs and...

  • Page 70
    ...' Equity Convertible preferred stock ...- 914.1 Common stock and additional paid-in capital-$0.01 par value, 3,000,000,000 shares authorized, 1,383,649,451 shares issued and outstanding at December 31, 2003; $0.01 par value, 1,000 shares authorized, 200 shares issued and outstanding at December 31...

  • Page 71
    ... to Raytheon purchase price settlement ...Subsidiary common stock issued in connection with acquisition and other ...Minimum pension liability adjustment ...Foreign currency translation adjustments ...Cumulative effect of accounting change ...Unrealized gains (losses) on securities and derivatives...

  • Page 72
    ... long-term debt ...Debt issuance costs ...Stock options exercised ...Special cash dividend paid to General Motors ...Preferred stock dividends paid to General Motors ...Payment of Raytheon settlement ...Net Cash Provided by Financing Activities ...Net cash provided by (used in) continuing operations...

  • Page 73
    ...consists of the DIRECTV digital multi-channel entertainment businesses located in the United States and Latin America. • DIRECTV Holdings LLC ("DIRECTV U.S.") launched its direct-to-home service in 1994. DIRECTV U.S. is the largest provider of direct broadcast satellite television services and the...

  • Page 74
    ... Internet access service marketed under the DIRECWAY® brand. In addition, HNS is one of the two largest manufacturers of DIRECTV® set-top receivers. HNS is also developing SPACEWAY®, a more advanced satellite broadband communications platform that is expected to provide customers with high-speed...

  • Page 75
    ...in making estimates, actual results reported in future periods may be affected by changes in those estimates. Reclassifications The Company announced, in December of 2002, that DIRECTV Broadband, Inc. ("DIRECTV Broadband") would close its high-speed Internet service business. In the first quarter of...

  • Page 76
    ... Sales are generally recognized as products are shipped or services are rendered. Direct-To-Home subscription and pay-per-view revenues are recognized when programming is broadcast to subscribers. Subscriber fees for multiple set-top receivers, DIRECTV-The Guide, warranty services and equipment...

  • Page 77
    ... for third-party customer acquisitions, although paid in advance, are earned by the retailer or dealer over 12 months from the date of subscriber activation and may be recouped by the Company on a pro-rata basis should the subscriber cancel the service during the 12 month service period. Accordingly...

  • Page 78
    ...equivalents consist of highly liquid investments purchased with original maturities of three months or less. Contracts in Process Contracts in process are stated at costs incurred plus estimated profit, less amounts billed to customers and advances and progress payments applied. Engineering, tooling...

  • Page 79
    ... in the period a full or partial loss of the satellite occurs. Capitalized customer leased set-top receiver costs include the cost of hardware and installation. Depreciation is computed generally using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are...

  • Page 80
    ... useful life of the related asset. Foreign Currency Some of the Company's foreign operations have determined the local currency to be their functional currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange...

  • Page 81
    ...the straight-line method over the term of the respective obligation. Stock-Based Compensation The Company issues common stock options to employees with exercise prices equal to the fair value of the underlying security at the date of grant. The Company also grants restricted stock units to employees...

  • Page 82
    ....8 million in 2001. Market Concentrations and Credit Risk The Company provides services and extends credit to a number of wireless communications equipment customers and to a large number of consumers, both in the U.S. and Latin America. DIRECTV U.S. has significant accounts receivable from the NRTC...

  • Page 83
    ... for DLA and DIRECTV Broadband in the fourth quarter of 2002. As a result of completing step two, the Company determined that the carrying value of reporting unit goodwill exceeded the fair value of that goodwill and that all of the goodwill recorded at DLA and DIRECTV Broadband, $631.8 million and...

  • Page 84
    ... the accounting required by EITF Issue No. 00-21 prospectively to transactions entered into after June 30, 2003. The adoption of this standard did not have a significant impact on the Company's consolidated results of operations or financial position. The Company adopted SFAS No. 150, "Accounting...

  • Page 85
    ... of discontinued businesses such as DIRECTV Broadband, which previously would not have been reported as a discontinued operation, have been reported as a discontinued operation in the Consolidated Statements of Income under this new standard in all periods presented herein. The Company adopted SFAS...

  • Page 86
    ...the cost of its property and satellites under construction. Note 4: Leasing Activities Future minimum payments due from customers under sales-type leases and related service agreements, and noncancelable satellite transponder operating leases as of December 31, 2003 are as follows: Sales-Type Leases...

  • Page 87
    ... in sales-type leases ... $238.2 98.5 139.7 23.0 $116.7 $277.6 92.8 184.8 22.9 $161.9 Note 5: Goodwill and Intangible Assets The changes in the carrying amounts of goodwill by reporting unit for the years ended December 31, 2003 and 2002 were as follows: Direct-ToHome Broadcast Satellite Network...

  • Page 88
    ... of a debt guarantee provided by the Company for the benefit of Motient Corporation ("Motient"). In connection with the payment, the Company received from Motient 7.1 million shares of XM Satellite Radio Holdings, Inc. ("XM Satellite Radio") common stock, with a market value as of November 2001 of...

  • Page 89
    ....6 542.4 $1,269.9 $1,059.0 During 2001, the Company announced a nearly 10% reduction of its approximately 7,900 employees, excluding DIRECTV customer service representatives, located in the U.S. As a result, about 750 employees across all business disciplines were given notification of termination...

  • Page 90
    ... ratably secured with the bank facility by substantially all of PanAmSat's assets, including its satellites. The fair value of the Company's notes payable was approximately $3,057 million and $1,491 million at December 31, 2003 and 2002, respectively, based on quoted market prices on those dates. 83

  • Page 91
    ... equal to the London Interbank Offered Rate ("LIBOR") plus 2.75%, which may be increased or decreased under certain conditions. The revolving credit facility was not affected by the amendment. DIRECTV is required to pay a commitment fee of 0.50% per year on the unused commitment under the revolving...

  • Page 92
    ...B Term Loan under a new Term Loan B-1 facility with an interest rate of LIBOR plus 2.5% and scheduled annual maturities of principal in varying amounts from 2004 through 2010. As a result of this amendment, the amount of the revolving credit facility, its termination date and the provisions relating...

  • Page 93
    ... TO THE CONSOLIDATED FINANCIAL STATEMENTS - (continued) payments, including dividends; create or permit to exist certain liens; enter into business combinations and asset sale transactions; make investments; enter into transactions with affiliates; and enter into new businesses. If DIRECTV U.S. or...

  • Page 94
    ... and amortization ...- Net operating loss and tax credit carryforwards ...805.1 Programming contract liabilities ...150.1 Unrealized gains and losses on securities ...- Tax basis differences in investments and affiliates ...78.1 Discontinuation of DIRECTV Broadband business ...- Other ...186...

  • Page 95
    ... parent of a separate affiliated group of corporations filing a consolidated return. The Company will be compensated by GM for any tax benefits, such as net operating loss and tax credit carryforwards, that have not been used to offset the Company's separate income tax liability through the date...

  • Page 96
    ... plans. Benefits are based on years of service and compensation earned during a specified period of time before retirement. Additionally, an unfunded, nonqualified pension plan covers certain employees. The Company also maintains a program for eligible retirees to participate in health care and life...

  • Page 97
    ...$ 27.6 Service cost ...23.0 21.7 0.5 0.5 Interest cost ...35.4 33.8 1.9 2.2 Plan participants' contributions ...1.9 1.9 - - Amendments ...- - (4.6) - Actuarial (gain) loss ...52.1 26.4 (0.4) 5.7 Benefits paid ...(43.8) (42.7) (3.5) (2.7) Net benefit obligation at end of year ...Change in Plan Assets...

  • Page 98
    ...% 5.00% Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31: Other Postretirement Benefits 2003 2002 2001 Pension Benefits 2003 2002 2001 Discount rate ...Expected long-term return on plan assets ...Rate of compensation increase ... 7.00% 7.25...

  • Page 99
    ... in a manner so as to comply at all times with applicable government regulations. There were no shares of the Company's common stock included in plan assets at December 31, 2003 and there were no shares of GM Class H common stock shares included in the plan assets at December 31, 2002. 92

  • Page 100
    ...legally enforceable liabilities of the Company. Note 11: Stockholders' Equity Capital Stock and Additional Paid-In Capital The Company is a publicly-traded company with its common stock listed as "DTV" on the New York Stock Exchange. As part of the News Corporation transactions completed on December...

  • Page 101
    THE DIRECTV GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (continued) Prior to the split-off of the Company from GM on December 22, 2003, GM held all of the outstanding capital stock of the Company. GM Class H common stock was a publicly-traded security of GM and was a "tracking stock...

  • Page 102
    ... would be antidilutive. The Company's existing common equivalent shares consist entirely of common stock options and restricted stock units issued to employees. For the year ended December 31, 2003, 91.2 million shares of common stock options and 3.6 million restricted stock units were excluded from...

  • Page 103
    ...by the GM Board of Directors in 1999, shares, rights or options to acquire up to 159 million shares of common stock on a cumulative basis were authorized for grant though December 31, 2003, subject to Executive Compensation Committee approval. In connection with the News Corporation transactions, on...

  • Page 104
    ... Plan using the Black-Scholes valuation model along with the assumptions used in the fair value calculations: 2003 2002 2001 Estimated fair value per option granted ...Average exercise price per option granted ...Expected stock volatility ...Risk-free interest rate ...Expected option life (in years...

  • Page 105
    ...remaining life ranging from 3.3 to 10 years. At December 31, 2003, 4,115,726 options were exercisable at a weighted average exercise price of $34.23 per share. During the year ended December 31, 2003, PanAmSat granted 400,500 restricted stock units to its employees with a weighted average grant-date...

  • Page 106
    ... any of the LOCs providing the DIRECTV service in Latin America and the Caribbean. During the bankruptcy proceedings, DLA LLC continued to manage its business as a debtor-in-possession. On December 11, 2003, DLA LLC filed a proposed Reorganization Plan that reflected an agreement reached between...

  • Page 107
    ... the Direct-To-Home Broadcast segment. The purchase price was $197.8 million and was paid in cash. On December 13, 2002, the Company announced that DIRECTV Broadband would close its high-speed Internet service business in the first quarter of 2003 and transition its existing customers to alternative...

  • Page 108
    ... providers and shut down its high-speed Internet service business. In the fourth quarter of 2002, the Company recorded a charge of $92.8 million related to accruals for employee severance benefits, contract termination payments and the write-off of customer premise equipment. Included in the $92...

  • Page 109
    ... the date of acquisition. DIRECTV Japan On March 1, 2000, the Company announced that the operations of DIRECTV Japan would be discontinued. Pursuant to an agreement with Japan Digital Broadcasting Services Inc. (now named Sky Perfect), qualified subscribers to the DIRECTV Japan service were offered...

  • Page 110
    ... for cable television systems, news companies, Internet service providers and private business networks. The Network Systems segment is a provider of satellite-based private business networks and broadband Internet access, and a supplier of DIRECTV receiving equipment (set-top receivers and dishes...

  • Page 111
    THE DIRECTV GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (continued) Selected information for the Company's operating segments is reported as follows: Direct-To-Home Broadcast Satellite Services Network Systems Other (Dollars in Millions) Eliminations Total 2003 External Revenues ...

  • Page 112
    ... capital expenditures and business acquisitions. The Company believes this measure is useful to investors, along with GAAP measures (such as revenues, operating profit and net income), to compare the Company's operating performance to other communications, entertainment and media service providers...

  • Page 113
    THE DIRECTV GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table presents revenues earned from customers located in different geographic areas. Property is grouped by its physical location. All satellites are reported as U.S. assets. Total Revenues 2003 Net ...

  • Page 114
    THE DIRECTV GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (continued) State on China launch issues of the mid-1990s. Also in connection with the settlement, HNS agreed to extend the scheduled launch date for the first Boeing built SPACEWAY satellite from the fourth quarter of 2003 ...

  • Page 115
    ... telecommunications and broadcast services company, DIRECTV U.S. agreed to provide Telesat, subject to FCC approval, the use of the DIRECTV 3 satellite, which is currently used as an in-orbit spare, through the end of its useful life and in return Telesat agreed to allow DIRECTV U.S. the use of its...

  • Page 116
    ... be received. PanAmSat is developing plans to replace Galaxy 4R prior to the end of its useful life using anticipated insurance proceeds and a spare launch service contract that was purchased previously. Once a settlement is reached with the final insurance provider, PanAmSat anticipates that future...

  • Page 117
    ...The Company will record a pre-tax gain of $164.0 million in 2004 as a result of this transaction. During the first quarter of 2004, the Company announced the reduction of corporate office headcount by over half in connection with a plan to consolidate Corporate and DIRECTV support functions. DLA LLC...

  • Page 118
    ... and cumulative effect of accounting change" for the fourth quarter of 2003 are a $132.0 million charge related primarily to investment advisor fees, employee retention and severance benefits in conjunction with the completion of the News Corporation transactions and reorganization expenses of...

  • Page 119
    ... for its 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year. *** PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page Number...

  • Page 120
    ... Communications Company and certain additional outstanding capital stock, dated as of January 13, 2000 (incorporated by reference to Exhibit 2.5 to the Annual Report on Form 10-K for the year ended December 31, 1999 of Hughes Electronics Corporation (the "1999 10-K")) Stock Purchase Agreement, dated...

  • Page 121
    ... dated as of January 5, 2001, among DIRECTV Latin America, LLC, the Banks named therein and Deutsche Bank A.G., New York Branch, as Administrative Agent (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2000 of Hughes Electronics Corporation...

  • Page 122
    ... Electric Capital Corporation, Industrial Bank of Japan, Societe Generale, The Bank of New York, Metropolitan Life Insurance Company and Credit Industrial et Commercial, as Lenders, Credit Suisse First Boston, as Administrative Agent, Credit Suisse First Boston, as Sole Bookrunner and Sole Lead...

  • Page 123
    ... Agreement, dated as of March 6, 2003, among DIRECTV Holdings LLC, DIRECTV Financing Co., Inc., DIRECTV, Inc., USSB II, Inc., DIRECTV Customer Services, Inc., DIRECTV Merchandising, Inc., DIRECTV Enterprises, LLC and DIRECTV Operations, LLC, as Assignors, and Deutsche Bank Trust Company Americas, as...

  • Page 124
    ...-Q) First Amendment to the Credit Agreement, dated as July 30, 2003, between DIRECTV Holdings LLC, Deutsche Bank Trust Company Americas and Bank of America, N.A. (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q of Hughes Electronics Corporation filed on August 8, 2003...

  • Page 125
    ...the Credit Agreement, dated as of March 9, 2004 among DIRECTV Holdings LLC, various lenders, Deutsche Bank Trust Company Americas, as Administrative Agent, and Bank of America, N.A., as Syndication Agent (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K for the year ended...

  • Page 126
    ... DIRECTV GROUP, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF INCOME (Parent Company Only) Years Ended December 31, 2003 2002 2001 (Dollars in Millions) Operating Costs and Expenses Selling, general and administrative expenses ...Total operating costs...

  • Page 127
    THE DIRECTV GROUP, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT - (continued) CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only) Years Ended December 31, 2003 2002 2001 (Dollars in Millions) Cash Flows from Operating Activities Net Cash Provided by (Used in) Operating ...

  • Page 128
    ... or advances. In the parent company only financial statements, the Company's investment in subsidiaries is stated at cost, net of equity in earnings (losses) of subsidiaries, since the date of formation/acquisition. As a result, the Company's interest in the net assets of DIRECTV Holdings LLC and...

  • Page 129
    ...Balance at end of year Description For the Year Ended December 31, 2003 Allowances Deducted from Assets Accounts and notes receivable (for doubtful receivables) ...Net investment in sales-type leases (for doubtful receivables) ...Inventories (principally for obsolescence of service parts) ...Total...

  • Page 130
    ...authorized. THE DIRECTV GROUP, INC. (Registrant) Date: March 17, 2004 By: /S/ BRUCE B. CHURCHILL Bruce B. Churchill (Executive Vice President and Chief Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 17th day of March...

  • Page 131
    THE DIRECTV GROUP, INC. Signature Title /S/ EDDY W. HARTENSTEIN (Eddy W. Hartenstein) /S/ CHARLES R. LEE (Charles R. Lee) PETER A. LUND (Peter A. Lund) JOHN L. THORNTON (John L. Thornton) Director Director /S/ Director /S/ Director *** 124

  • Page 132
    EXHIBIT 31.1 THE DIRECTV GROUP, INC. CERTIFICATION I, Chase Carey, Director, President and Chief Executive Officer, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of The DIRECTV Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material ...

  • Page 133
    EXHIBIT 31.2 THE DIRECTV GROUP, INC. CERTIFICATION I, Bruce B. Churchill, Executive Vice President and Chief Financial Officer, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of The DIRECTV Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of...

  • Page 134
    ...2002 In connection with the Annual Report of The DIRECTV Group, Inc. (the "Corporation") on Form 10-K for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Chase Carey, Director, President and Chief Executive Officer of...

  • Page 135
    ... with the Annual Report of The DIRECTV Group, Inc. (the "Corporation") on Form 10-K for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce B. Churchill, Executive Vice President and Chief Financial Officer of the...

  • Page 136
    ... David F. DeVoe Senior Executive Vice President and Chief Financial Officer News Corporation Deloitte & Touche LLP 350 South Grand Avenue, Suite 200 Los Angeles, CA 90071-2462 Romulo G. Pontual Executive Vice President Eddy W. Hartenstein Vice Chairman The DIRECTV Group, Inc. Patrick T. Doyle...

  • Page 137
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